TOKYO, Sept 8 (Reuters) - Japan's stocks surged, the yen

weakened and bonds stood firm on Monday after Prime Minister

Shigeru Ishiba's resignation stoked speculation that his

successor will raise government spending.

The Nikkei 225 index gained 1.7% to 43,740.15, while

the broader Topix rose 1% to a record high. The yen

softened 0.7% to 148.46 versus the U.S. dollar.

The benchmark 10-year Japanese government bond (JGB)

yield rose 0.5 basis point (bp) to 1.575%. The five-year yield

slid 0.5 bp to 1.1%.

Yields on super-long JGBs hovered near record highs due to

global concerns about fiscal deficits and as pressure mounted on

Ishiba from within his Liberal Democratic Party (LDP), while the

Nikkei recently slipped from last month's record high.

Among top contenders in the LDP leadership race is Sanae

Takaichi, a devotee of "Abenomics" policies of Shinzo Abe -

Japan's long-time leader and former PM, who presided over

massive stimulus and unprecedented monetary easing.

"Sanae Takaichi, who is considered to have a strong

expansionary fiscal bias, could be perceived as more positive

for Japanese equities," Morgan Stanley and MUFG Securities

analysts, including Takeshi Yamaguchi, wrote.

"The risk of her favouring excessively dovish monetary

policy appears lower than last year."

Meanwhile, Takaichi has largely been seen as bad news for

Japan's already stressed bond market.

"She's known to favour stimulus measures and is viewed as

wanting the Bank of Japan (BOJ) to take a cautious stance on

policy, so that wouldn't be a great outcome for bond markets,"

Skye Masters, head of markets research at National Australia

Bank, said in a podcast.

Ishiba's relatively conservative fiscal stance has been seen

as a positive for the JGB market, where yields are relatively

low globally, though Japan's massive debt pile and widening

fiscal deficits continue to raise concerns.

The country's outstanding debt stands at nearly 250% of its

gross domestic product (GDP), the highest among developed

economies. Budget requests for the next fiscal hit a record for

the third straight year, the finance ministry said last week.

The JGB market was dealt a blow in mid July, when Ishiba's

coalition suffered a considerable defeat in upper house polls.

Outsider parties, campaigning on tax cuts and increased

spending, gained seats, and speculation swirled for weeks about

pressure on Ishiba to step down.

That all came to a head on Sunday, with Ishiba, saying he

must take responsibility for election losses and instructing the

LDP to hold an emergency leadership vote.

The Nikkei share index hit a record high of 43,876.42 on

August 19, riding a wave of optimism for corporate governance

reforms and investment in artificial intelligence.

Analysts in a Reuters poll see the index easing off that

level to 42,000 by year end.